TakePart Forum: The Future of Oil

Will we ever see two-dollar gas again? And would that really be a good thing?
Nov 21, 2013· 18 MIN READ
Bryan Walsh is a senior writer for Time magazine, covering energy and the environment.

The world’s energy use and economic growth have correlated closely for nearly two centuries: The more we use, the richer we get. With climate change, however, that formula is becoming more complicated, as energy use that emits greenhouse gas contributes to economic disruption caused by stronger and more frequent storms and more expensive disaster insurance and infrastructure. At the same time, developing economies are growing by increasing their energy use—and because much of that economic activity occurs in places with abundant fossil fuels, it’s contributed further to global emissions.

Earlier this month, hours after Typhoon Haiyan struck the Philippines, killing at least 3,900 people and causing an estimated $14.5 billion in damage, TakePart assembled four thought leaders in the fields of energy economics and the environmental consequences of fossil fuel use to discuss one energy source that has had a virtual stranglehold on transportation, a crucial element of any thriving economy: petroleum.

A decade ago, discussions on the future of oil focused on how soon it would run out: “Peak oil” theory posited that as the amount of oil already burned exceeded the amount left in the ground, prices would rise in response, crowding out consumer spending in other areas of the economy because of the increasing inelasticity of demand of oil—itself a function of oil’s near monopoly on moving people and goods around the world. Since then, technology has unlocked apparently enormous reserves of previously inaccessible oil, shifting debates from how much of it is left to how to accurately measure the apparently vast new supplies. (As our participants discussed, however, that didn’t necessarily mean “peak oil” was wrong.)

What does the boom in “unconventional” oil—from sources such as deep undersea, tar sands, and rock formations—mean for the world economy and the prospect of drastic climate change? Will higher prices paid for oil that’s more expensive to reach lead to faster development of alternatives to oil or an acceleration of global warming? What are the viable alternatives? And what can consumers, activists, and advocates do to put the transport economy on a sustainable path?

Bryan Walsh, the senior writer on energy and the environment for Time magazine, moderated our discussion. Joining him in the forum were:

Chris Nelder

An independent energy analyst, author and speaker, Nelder is currently a policy officer at Global Footprint Network, a think tank that calculates resource use by cities, countries, businesses, and individuals.

Ramez Naam

After working at Microsoft for years as a developer of Internet Explorer, Naam turned his focus to future technologies. He is the author of The Infinite Resource: The Power of Ideas on a Finite Planet.

Anne Korin

Korin is the co-director of the Institute for Analysis of Global Security and the author of Energy Security Challenges for the 21st Century and Petropoly: The Collapse of America's Energy Security Paradigm.

The transcript of the forum, conducted by conference call, has been edited for length, flow, and clarity.

Bryan Walsh:

Last month came the news that Eike Batista, the Brazilian billionaire, had lost his fortune after oil deposits controlled by his company were producing only 2 percent of predicted output. When you see a new supply proving to be more difficult to tap than promised, is there something we can take from that in terms of where we’ll be going in the future?

Chris Nelder:

There’s a history here: When you go into a new type of resource that you haven’t really exploited before, there’s a very well-known curve of activity that happens. First, it’s discovered, and you get these wild pronouncements about how much of it there is, how cheap it’s going to be, it’s going to put OPEC out of business, blah blah blah. Then you actually start trying to produce it, and almost invariably, the reality comes in well below expectations. We’ve seen this in deepwater oil exploration over and over again.

The enthusiasm around the pre-salt oil, which is a mile or two beneath the floor of an ocean a mile deep, was always based on how much of it there is. But you don’t actually know what it’s going to cost to produce it until you try to do it. And now they’re discovering it’s a lot more difficult than it was initially sold to be.

There’s a reason for that history. The oil companies want to generate a lot of excitement because they need to raise a lot of money from investors to produce the oil. So they deliberately tell a story that’s more bullish than it ought to be.

And we’ve seen this happen in tight oil in the U.S. We’ve seen it happen in shale gas in a big way, where the initial pronouncements were just super-exciting: “We’ve got 100 years of shale gas, it’s going to be cheap forever.” But when the big companies like Exxon Mobil bought up some of the early leases, they wound up holding the bag on something that turned out to be unprofitable.

So those of us who have followed the oil markets for years have seen this movie before, and what happened with the Brazilian pre-salt should have not been a surprise to anyone.

Ramez Naam:

We don’t know for sure, but most likely, this formation will end up getting developed more slowly with less output and at a higher cost than expected. But it will end up contributing somewhat to the overall supply, just not in the dramatic and mega-profitable way that Batista tried to sell to his investors, and sold to himself.

Walsh:

If these newer sources are going to be that difficult to develop, and more expensive, how much of a difference is this going to make? Does it extend the oil era but in a much more expensive, environmentally destructive way?

Anne Korin:

Is it going to lower the price of oil? No, because this stuff is really expensive to extract. The cheapest oil to discover and get out of the ground is in places where for geopolitical or internal domestic stability reasons don’t want to extract it. It’s only $2.50 per barrel to lift oil in Saudi Arabia, and I think the discovery cost there is maybe 10 cents a barrel. So it’s the cheapest in the world—but you’re not going to see an expansion of capacity there, because it’s in their interest to keep supply tight, so that prices stay high: Saudi Arabia and the Gulf States need a high price of oil, especially post-Arab Spring, with the drastically increased domestic spending they’ve incurred to mollify their populace. If the price of oil is high enough, all these new resources become economic to extract, and therefore will be extracted. But it’s not going to add cheap supply to the market.

Naam:

That’s the thing that peak oil theory—the idea that as conventional supplies peaked, the price of oil would inexorably rise—missed: It didn’t take into account that at a higher price of oil, there’s more motivation to go after the stuff that’s expensive to reach. Between 1950 and 1960, world oil production doubled. In the last 10 years, we’ve seen a 6 or 7 percent gain. Oil today costs five times what it cost then, adjusted for inflation. We are working harder going after more and more expensive sources, and just barely eking out more gain. There’s every indication that all the unconventional sources and the deepwater sources and so on will continue that trend of being expensive oil that we’re willing to pay for, because demand is still exceeding the supply for the foreseeable future.

Korin:

As long as oil is the currency that we’re dealing with in the transportation fuel market, as long as we don’t open the transportation fuel market to fuel competition, there’s nothing that’s going to substantially drive oil price down, except, I’d say, total collapse of the global economy.

Nelder:

I would agree with that. There are no cheap supply-side solutions. If we want more supply in the future, I think oil prices need to go even higher, maybe substantially higher, because as Ramez suggested, we’ve burned through the cheap and easy stuff. What’s left is difficult and hard, and that means it’s expensive.

I think that rise in price, combined with the response of oil companies to go after the difficult stuff because they could sell it at a price that made that exploration and extraction profitable, has proven peak oil theory quite correct. From 2000 to 2007, people were saying that oil was going to go back to $38 a barrel, and that peak oil was nonsense and we had all these additional supplies from deepwater and pre-salt and Venezuelan heavy oil and so on. Well, price showed that that was not true—if we’d had that supply the price would not have gone up as dramatically as it did. We had to increase the price by multiples in order to keep supply basically flat. The same thing is going to be true in the future.

The question is, what is the consumer able to pay? That is the answer to your question of whether or not oil supply can increase to meet demand in the future. It’s going to be a function of price. If oil needs to be, say, $200 a barrel by 2020 to meet demand, well, then you have to ask yourself, is the U.S. consumer able to pay seven or eight dollars per gallon?

Korin:

We’re talking about the future of oil, but we have to ask ourselves, Why do we care about oil so much in the first place? Oil is important because it has a virtual monopoly over transportation fuel, but it’s not the only fuel you can use to move people and goods from one place to another. I don’t think we can look at the oil market in a vacuum. In every sector in which oil has faced competition from other commodities, it has lost market share, because compared to other energy resources, per unit of energy oil is very, very expensive.

We used to generate a lot of electricity from oil, but today only 1 percent of our electricity is generated from oil, except of course in the Persian Gulf, because now we have alternatives. There are now liquid fuels that can be made economically from natural gas or coal—alcohol fuels, which don’t have to be made from agricultural commodities like corn or soy, driving up food prices. In the same way, if you open cars to fuel competition, consumers can make an on-the-fly choice among fuels. These cars don’t cost significantly more than gasoline- or diesel-only cars. Investors then have a built-in incentive to expand capacity in those fuels that they believe will be competitive against the broad range of oil prices.

If you have that kind of situation, then I believe oil will not only lose its strategic influence, but will fall in price, because for the first time, it will be facing competition from substitute products. That’s what it’s going to take to drive the price of oil down.

Nelder:

I don’t think that oil faces any real competition now or in the future from any other liquid fuel. I’ve looked at all the other liquid fuels out there, and I think that, in typical fashion, their potential to scale and their low price has been really overhyped. I don’t think you can actually produce, at scale, additional amounts of alcohol fuel or biofuel or natural gas-based liquid fuel or coal-to-liquids at the advertised prices.

Korin:

But China’s production of methanol from coal has expanded drastically over the past several years. You’ve seen rampant illegal blending, because the fuel is so cheap compared to gasoline on a per-mile basis. They’re just going to keep expanding capacity, and automakers selling cars in China are going to be making flexible-fuel cars, because people want to be using this cheap, coal-based alcohol.

Walsh:

Do we have externally-verified numbers on what it actually costs them to make that fuel?

Korin:

Absolutely. If you’re making methanol from natural gas, at today’s natural gas prices, it’s 42 cents a gallon. Even if natural gas doubles in price, you’re still doing very well.

Walsh:

Is there an additional carbon price on methanol?

Korin:

Any time you make a fuel from coal, you’re going to have higher total emissions than with.

Naam:

Because the coal itself is a dirty hydrocarbon.

Korin:

But if you look at converting natural gas to synthetic petroleum products, it’s less carbon-intensive than with oil.

Walsh:

China doesn’t have a lot of natural gas.

Korin:

And its major priority is low-cost energy. Their diplomats might talk about reducing emissions, but that’s not a driving factor in the way the economy develops there. That’s even more true in India.

Walsh:

That’s got to be pretty concerning. If their demand is going to continue to rise, and we’re going after carbon-intensive fuels—whether unconventional oil, or coal-to-liquids—there will be a massive environmental consequence.

Korin:

Yeah. The oil that is being extracted from shale formations in the U.S. is the liquid oil in the crevices of the shale. It’s oil that’s really, really, expensive. Eventually, if the price of oil goes high enough, you’re going to take the actual shale rock, and extract oil from it, either by crushing it or heating it or whatever, and that’s going to be super-carbon-intensive. If you look at tar sands oil, which is what the Keystone XL pipeline would be bringing to the U.S., you’re talking about a hard-core industrial activity. It’s not just sticking a straw in the ground and liquid comes out. The production is more energy-intensive, and you have to spend more energy to make the tar sands into oil as we know it, if you will, which also means additional carbon emissions. Carbon-intensiveness and cost correlate quite well: The harder it is to take something and convert it to a usable fuel, the more expensive it will be, and the more CO2 you’re going to emit in the process.

To my mind, the problem is the price of oil is too high. I think environmentalists have made a very large mistake by thinking that expensive oil is good for the environment. The more expensive oil is, the more CO2-intensive resources you’re going to extract. The environmentalists don’t like the oil that’s extracted from tar sands, but if oil were cheap, this wouldn’t be an issue.

If your focus is reducing greenhouse gas emissions, you should want oil to be cheap. So you should be driving for vehicles that can handle a variety of fuels. If they’re made through natural gas, those fuels are going to be less carbon-intensive than the very difficult-to-extract oil that will be looked at if oil prices get higher and higher. And those fuels are competitive at fairly moderate oil prices: Methanol from natural gas and ethanol from sugarcane are competitive with oil at around $45 a barrel.

Naam:

I think your point that high oil prices lead to development of dirtier fossil fuels is a good one. But it has also led to slowing of oil demand, and to an increased pace of development of alternatives. Environmentally, to date, the high cost of oil over the last several years has definitely been positive for the environment. What’s going to happen down the road depends on whether a high price leads more to the development of green alternatives, or more to the development of very dirty resources. We’ve increased oil production in the U.S. by 2 million barrels a day, and we’ve reduced our demand, since 2006, by about 3 million barrels a day—even as the U.S. economy is larger. A good chunk of that reduced demand is greater efficiency; also, our miles traveled has stayed essentially flat. So in the U.S. reduced demand is already a bigger fuel source, if you will, than unconventional oil.

I think that’s an important component. The carbon emissions from transport globally are lower right now than they would be if oil was still $20 a barrel. We would be burning a lot more oil and emitting a lot more CO2 around the world, for sure, if oil was still $20 a barrel today. It might be that 10 years from now, we’ll wish it had stayed at $20, because, if oil prices stay high 10 years from now, we’re going to be crushing a lot of shale rock. But as of right now, we definitely did a positive thing for carbon emissions.

The issue with methanol, though, is that it has less than half the energy density of gasoline, and only two-thirds the energy density of ethanol. So a tank of methanol will take you less than half as far as a tank of gasoline. And that’s always been the problem for electric cars—consumers have range anxiety.

Nelder:

I feel like this is all rather hypothetical, because we don’t actually have a way to bring oil prices back down. If we did, we would. If there were serious competition from some other liquid fuel, that might cause the price of oil to go down. It would all depend on at what scale it was actually happening.

What the U.S. and Europe have given up in oil demand has been taken up by the developing world, almost exactly barrel for barrel, since 2005.

Korin:

I believe that neither China nor India is going to be optimizing for climate change. In the U.S., electric vehicles are part of a competitive transportation fuel market, and will always become cleaner as time goes by, because the grid is becoming cleaner. In the same way, if you have a flex-fuel car, which can substitute gasoline, ethanol from biomass, or methanol from natural gas—today you make that methanol from natural gas, but maybe tomorrow you’ll make that methanol from recycled CO2. If you have the platform, you have a market for the new fuels. If you don’t have the vehicle platform, then there’s zero market for those fuels.

Naam:

Anne, wouldn’t you agree that there’s 800 million cars on the road already, so whatever alternative fuels we develop are going to have to be a drop-in or an easy retrofit for those existing vehicles? Because there’s so many vehicles on the road today, and turnover is slow.

Korin:

The question is, When is there business case for a Midas or Meineke or an entrepreneur on used car lots to offer retrofits to those vehicles—to turn them into multi-fuel cars? You need to have the fuel at the station first. Then you have to ask yourself, OK, when is there a business case for a fuel station owner to install the pumps, or retrofit existing ones, to serve some other fuel? Until you get to a point where 15 or 20 percent of the cars in the area can use the fuel, he has no business case.

So how do you get 15 to 20 percent of cars using alternative fuel? I say, if you start with the new cars, if you ensure that new cars rolling onto the roads are multi-fuel vehicles, after two or three years, given fleet turnover, you hit a point where you pass that 15 or 20 percent threshold of the fleet to where it makes sense for fuel station owners to install the pumps. When the fuel is at the station, and often that fuel on a per-energy-unit basis will be cheaper than gasoline, you have a market for that fuel.

Then you’ll have entrepreneurs that offer retrofits, and if you look at retrofitting a vehicle to be fuel-flexible, it’s not very expensive. For an automaker to make a car flex-fuel is under $100. To retrofit in the secondary market, you’re probably looking at $300 or $400.

Nelder:

In theory, sure, we could run all kinds of vehicles on methanol. Show me a million barrels a day of methanol and tell me the price, and then I’ll be interested. Show me a lot of vehicles getting converted to run on some other fuel, then I’ll be interested.

Korin:

Go to China and you will see, because China has gone from zero to almost 10 percent methanol in its fuel supply, and this is not via a mandate, like we have with ethanol, or anything like that. It’s simply because the fuel’s cheaper. If you’re an auto company selling a car in China, it’s going to need to be able to run on a variety of alcohol blends. We have to focus on the vehicle side. Why would you bother expanding capacity in fuels that cars cannot use? If a new car has to be open to fuel competition, the automaker’s going to choose the least-cost way to do that, and the investor is going to choose the least-cost, highest-profit market fuel that they can sell.

Naam:

When the Obama administration rolled out the new fuel economy standards for cars and light trucks, the standards applied to something like 60 percent of fuel consumption in the U.S.. The other 40 percent of the oil consumption in the U.S. are fleet vehicles like delivery trucks, semi trucks, air travel, and so on. Fleet vehicles and long-distance transport are much easier to convert to alternative fuels because they don’t have the same issues of needing fueling stations anywhere—they all go back to the same place at night and can refuel there. That’s where we see people converting. I talked to the CEO of a Midwest trucking company. It cost them about $20,000 to convert a semi truck from diesel to natural gas, and that pays for itself in reduced fuel costs within about 18 months, because the fuel cost per mile using natural gas is basically one-quarter or one-fifth compared to oil. So, I do think we’ll do that switching.

Nelder:

I do think there’s a reasonably good opportunity here for fleet vehicles and long-haul trucking to convert to compressed natural gas. Because the economics are there, and the supply is there, and we know what the price is. So we have a significant number of companies stepping up to convert the vehicles and build the refueling stations.

I don’t see the evidence that they’re going to be doing that in any substantial degree with cars.

Naam:

Regarding the green alternatives, the basic math and physics says that things like algae biofuels theoretically should work. There’s nothing about biology or chemistry that says it shouldn’t work, and it should be able to work at amazing scale. We should be able to get more than enough fuel to power the planet without competing much with agriculture, and all on a very small fraction of our land.

Nelder:

I don’t see any evidence that excites me with respect to biofuels. We’ve got some ethanol supply in this country produced from corn, which has been blamed for driving up food prices. Globally, we have serious competition for land use. We’re not at all out of the woods today, in terms of being able to feed the world’s growing population. So to me, the idea that we’re suddenly going to appropriate vast amounts of land to grow energy crops to turn into liquid fuel is absurd. Now, it is possible that we could not use land and produce algae-based biofuels, but we’ve been told about this technology for a long time. So, I’m not ruling it out; I’m just trying to be realistic. Show me the cost. Show me the production. Show me the investors lining up to spend hundreds of billions of dollars on this, and then I’ll be interested.

I resist these optimistic forecasts because I think there’s a danger that people will hear this stuff—“Oh, we can make all kinds of fuel”—and they think to themselves, “Oh, well, I don’t have to do anything. There’s no problem. Everything is going to be sorted out.” That’s not the case. The truth is, we do have a very serious problem looming.

Walsh:

Is there going to be a lot of pain along the way, and are there policies that should be in place, even beyond the bigger ones like carbon pricing, to make some of those innovations more likely? What about divestment which is a movement growing here in the U.S.? Some activists are trying to get universities and pension funds and the like to divest from oil companies, the idea being that it will damage oil producers by driving down their stock prices. Aside from whether you think that might be viable politically, if it were successful, what kind of effect would that have on the market?

Korin:

We tend to overestimate our own importance in the developed world. The investor-owned oil companies—Exxon, Chevron, BP, Shell, etc.— own 6 percent of the world’s oil reserves. That’s all. The national oil companies, like Saudi Aramco, controlled by the Saudi royal family, sit on a quarter of the world’s oil reserves. They really couldn’t care less about divestment. It doesn’t affect them one iota. So, let’s say a divestment movement succeeds across all of the pension funds and everything else. The only thing you’re going to do is hurt the investor-owned oil companies, which are the only ones behaving in a market-oriented way here. You hurt Exxon, and you benefit Saudi Aramco. Is that what we want? I don’t think so.

Naam:

If you’re just purely acting as a selfish investor, that’s the better case to make for divestment—the idea that at some point it’s going to be much more expensive to emit greenhouse gas, which will drive revenues down for oil companies. If you anticipate that down the road, the reality of climate change is going to force more regulation—it’s going to put a price on carbon, which will drive more fuel efficiency, or limit emissions in some other way—that will impinge on the profits of these companies. That starts to make it look like perhaps their stock is currently overpriced, and that becomes a case for selling those shares.

You have to balance that against: Hey, the price of oil is really high, and the profit margins of oil companies are also very good. But Vinod Khosla, who’s a big investor in green tech, believes that down the road, oil will be incredibly cheap because we just won’t be burning very much of it. We’ll have replaced the bulk of it with next-generation biofuels and electric vehicles and so on. The history of these things is riddled with lots of failures, but the basic energy math of the planet says that there is plenty of energy that we should be able to capture in a green way and convert into liquid fuels that we can use in our vehicles, or convert into electricity that we could put into our vehicles.

That probably won’t have any impact on the price of oil or oil markets this decade or even two decades from now, but down the road, that’s the strategy we have to invest in, if we want to solve the twin problems of the economic impact of transportation fuels being very expensive, and the environmental and social cost of climate change from the carbon that we’re emitting.

Korin:

I think in terms of policy, in the U.S., what we could put in place is an open fuel standard. That’s a technology- and fuel-neutral policy that says to automakers, “You need to open your cars to fuel competition. You have to make cars that can take gasoline, ethanol, or methanol. You want to electrify them, you want to do natural gas, whatever you want to do, do it. But the cars need to be open to fuel competition.”

Naam:

Predicting exactly when technology like this will come to fruition—like with everything else we’ve talked about today—is very, very difficult. But there are two things that will drive that faster.

One of those is more direct R & D funding, and right now in the U.S., our direct R & D funding at the federal level for energy is at an all-time low as a fraction of our economy. It’s about a third of what it was in the 1980s, even as we need it more than ever.

The second is a high price in the marketplace for alternatives to compete with, whether that’s just the natural price of oil, which is high, or a carbon price levied on top of that. You see a heavy investment from venture capitalists and so on in algae and other next-generation biofuels, because the price of oil is high and they expect it to remain high.

So, I do think eventually we will crack this problem. I think we’ll come out of this choke point on the other side, and we’ll have figured out a way to power transportation at large scale in a way that doesn’t use the atmosphere as a dump for carbon dioxide. It’s just a matter of when do we actually get to the science and technology that is mature enough to do that.